Windmills, Depreciation, and Passive Use: Court Upholds Assessee’s Claim

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Case Name

Commissioner of Income Tax (LTU) vs. M/s. Lakshmi General Finance Ltd. (Merged with Sundaram Finance Limited) (High Court of Madras)

T.C.A. No. 269 of 2011

Date: 1st March 2021

Key Takeaways

• Depreciation Allowed for Passive Use: The court confirmed that assets like windmills qualify for depreciation even if they are only kept ready for use, not necessarily actively generating output.
• Trial Production Counts: Even minimal or trial production is enough to claim depreciation.
• Legal Precedents Matter: The court relied on several previous judgments that interpret “use” in Section 32 of the Income Tax Act to include both active and passive use.
• Revenue’s Appeal Dismissed: The tax department’s argument that actual generation is required was rejected.

Issue

Is an assessee entitled to claim depreciation on windmills under Section 32 of the Income Tax Act, even if the windmills did not generate any (or only negligible) electricity during the previous year?

Facts

• Parties: The Revenue (Commissioner of Income Tax) vs. M/s. Lakshmi General Finance Ltd., which later merged with Sundaram Finance Limited.
• Timeline: The dispute concerns the assessment year 1999-2000.
• Background: The company installed windmills and claimed depreciation on them. The tax authorities questioned this, arguing that since the windmills generated almost no electricity (practically 0.01 units), they were not “used” for business, and thus depreciation should not be allowed.
• Procedural History: The company’s claim was initially disallowed by the Assessing Officer, partially allowed by the Commissioner of Income Tax (Appeals), and then the matter went to the Income Tax Appellate Tribunal and finally to the High Court.

Arguments

Revenue (Tax Department)

• Main Argument: Depreciation should not be allowed because the windmills were not actually used for generating electricity during the year; mere readiness or trial production is not enough.
• Supporting Case Laws: Cited cases like “Dineshkumar Gulabchand Agrawal vs. CIT (2004) 267 ITR 768 (Bom)” where depreciation was denied if the asset was only kept ready for use and not actually used.

Assessee (Company)

• Main Argument: The windmills were installed, connected to the grid, and ready for use. Even if actual generation was negligible, the law allows depreciation for assets kept ready for use or used in a trial run.
• Supporting Case Laws: Relied on judgments like “Principal CIT vs. Larsen & Toubro Ltd., 403 ITR 248 (Bom)” and “CIT vs. Geo Tech Construction 244 ITR 452 (Kerala)” which support depreciation for assets kept ready for use or used in trial production.

Key Legal Precedents

The court discussed and applied several important precedents:

1. Principal CIT vs. Larsen & Toubro Ltd., 403 ITR 248 (Bom): Machinery used for trial production qualifies for depreciation.
2. CIT vs. Escorts Tractors Ltd., 56 Taxmann.com 333 (Delhi): Plant and machinery kept ready for use is enough to grant depreciation.
3. CIT vs. Southern Petrochemical Industries Corporation Ltd., 311 ITR 202 (Mad): Stand-by spare parts can qualify for depreciation.
4. CIT vs. Geo Tech Construction, 244 ITR 452 (Kerala): Assets in transit or kept ready for use amount to passive use and qualify for depreciation.
5. CIT vs. Refrigeration & Allied Industries Ltd., 323 ITR 672: Machinery kept in working condition and ready for use can claim depreciation.
6. CIT vs. Shahbad Co-op Sugar Mills Ltd., 12 Taxmann.com 421 (P&H): Machinery kept ready for use qualifies for depreciation.
7. Section 32 of the Income Tax Act: The section does not require the asset to be used throughout the year; “use” includes both active and passive use.

Judgement

• Decision: The High Court dismissed the Revenue’s appeal and ruled in favor of the assessee (the company).
• Reasoning: The court held that even if the windmills generated only negligible electricity, the fact that they were installed, connected, and ready for use means they were “used” for business purposes under Section 32. The court emphasized that “use” includes both active and passive use, and trial production or readiness is sufficient.
• Order: The appeal was dismissed, and the company’s claim for depreciation was upheld.

FAQs

Q1: Can a company claim depreciation on an asset if it is only kept ready for use and not actively used?

A: Yes, as per this judgment and several precedents, keeping an asset ready for use (passive use) is sufficient to claim depreciation under Section 32 of the Income Tax Act.

Q2: Does trial production count as “use” for depreciation purposes?

A: Yes, even if the asset is only used for trial production, it qualifies as “use” for claiming depreciation.

Q3: What if the asset generates only negligible output?

A: The amount of output is not decisive. As long as the asset is installed, connected, and ready for use, depreciation can be claimed.

Q4: What legal principle did the court rely on?

A: The court relied on the principle that “use” in Section 32 includes both active and passive use, and that readiness or trial production is enough for depreciation claims.

Q5: What does this mean for other businesses?

A: This judgment clarifies that businesses can claim depreciation on assets that are ready for use, even if they are not actively used or only used for trial production during the year.

Challenging the order passed in I.T.A.No.1186/Mds/2010 in respect of the Assessment Year 1999-2000 on the file of the Income Tax Appellate Tribunal, Chennai, ''B'' Bench (for brevity, the Tribunal), the Revenue has filed the above appeal.

2.1 The assessee company M/s. Lakshmi General Finance Limited got merged to M/s. Sundaram Finance Limited. The assessee filed its return of income for the assessment year 1999-2000 admitting total income of Rs.12,29,89,250/-. The return was processed under section 143(1a). Subsequently, a revised return was filed on 15.03.2001 reducing the total income to Rs.10,72,87,110/-, which was processed under section 143(1a). Thereafter, the assessment was reopened under section 147 on 21.03.2003 in order to disallow excess depreciation claimed by the assessee and the reassessment was completed on a total income of Rs.12,61,91,570/;- . The assessment was again reopened under section 147 on the basis of fresh information about excess depreciation laid on windmills. The reassessment was completed withdrawing the excess depreciation of Rs.1.10 crores.

2.2 Aggrieved over the order passed by the Assessing Officer, the assessee filed an appeal before the Commissioner of Income Tax (Appeals) and the Commissioner of Income Tax (Appeals) found that though the windmills were said to be connected with Grid at 2100 hours, on 31.03.1999, the meter reading practically showed 0.01 unit of power and the Assessing Officer disallowed 50% depreciation claimed by the assessee on the ground that they were not actually commissioned during the year under consideration.

2.3 The Commissioner of Income Tax (Appeals) relied upon the decision of the Bombay High Court in 267 ITR 768 [ Dinesh Kumar Gulabchand Agarwal} wherein he Bombay High Court held that even if the asset was kept ready for use, it would not e sufficient to claim depreciation. The Special Leave Petition filed before the Hon'ble Supreme court was also dismissed by the Apex Court.

2.4 Subsequently, the assessee filed an appeal before the Income Tax Appellate Tribunal, challenging the order passed by the Commissioner of Income Tax (Appeals) and the Tribunal rejected the case of the assessee and observed that even though the production of electricity was negligibly small, the facts remained that production had started. The Tribunal held that the assessee is entitled to 50% depreciation on two windmills, but remitted the issue of actual quantification to the Assessing Officer. Challenging the order passed by the Income Tax Appellate Tribunal, the Revenue has filed the above appeal.

3.The appeal was admitted on the following substantial question of law:

“ Whether on the facts and circumstances of the case, the Income Tax Appellate Tribunal was right in holding that the assessee was entitled to

claim depreciation on the windmills even though the wind mills had not generated any electricity during the previous year and thus there was no user of the asset for the purpose of the business of generation of power?"

4. Mr. Venkatanarayanan, learned counsel appearing for the respondent submitted that the issue involved in the present appeal is covered by the decisions of the Hon'ble Division Bench of this court dated 11.07.2019 made in T.C.A. Nos. 655, 666 and 657 of 2009 [M/s. Tenzing Match Works, Sivakasi v. The Deputy Commissioner of Income Tax Circle-1, Virudhunagar] wherein the Division Bench of this Court held as follows:-

" 5. Before we consider the applicability of these decisions, we need to take note of the following facts, which is very relevant in the instant case. As mentioned above, the assessee established a wind mill and it is the case of the assessee that electricity generation commenced from 31.03.2005. The competent authority to certify this is the Tamil Nadu Electricity Board, from whom the assessee obtained a certificate dated 02.04.2005, from the Executive Engineer (M&O)(Wind Mill), Palladam. This certificate shows that the assessee had effected supply of electricity to the Board on 31.03.2005. Further, statement was recorded from the Executive Engineer of the Board under Section 133(b) of the Act, wherein he appears to have stated, generation not started but work is over. Armed with this statement, the assessing officer stated that production of electricity as on 31.3.2005 was less than one unit and at best could be treated as trial production and the assessee having not produced electricity before 31.03.2005, cannot be stated to have put the wind mill to use for the purpose of business. It is not in dispute that the certificate issued by the competent authority states that electricity was generated on 31.3.2005, however the amount of electricity

which was generated was only 0.080 units. This, according to the assessing officer, is insufficient as it can be considered only as a trial run, but actual generation of electricity took place much after 31.3.2005. The Tribunal concurred with the findings of the Assessing Officer, but had referred to the aforementioned four decisions. In our considered opinion, all the four decisions cannot be applied to the facts of the present case.

6. In the case of “B.Malini and Co., -Vs- CIT (1995) 214 ITR 192 (Bom), there was a gap of one clear previous year between installation of machinery and its usage and hence it was held that no depreciation can be claimed. In

“The Deputy CIT -Vs- Yellamma Dasappa Hospital (2007 290 ITR 353 Kar), the Court found that the machinery has not been actually put to use. In “Dineshkumar Gulabchand Agrawal -Vs- CIT (2004) 267 ITR 768 (Bom),

the assessee claimed depreciation upon the machinery being kept ready for use and not put to use. In “CIT -Vs- Maps Tours and Travels (2003 260 ITR 655 Mad), no evidence was placed by the assessee before the Tribunal that the cars, which were purchased by them were used. Thus, we find that all the four decisions are not applicable to the present case and are on different set of facts and figures.

7. The case of the assessee before us strengthened in the light of the following decisions. In “Principal CIT -Vs- Larsen & Toubro Ltd., 403 ITR 248 (Bom)” , the machinery for trial production was held to qualify for deduction as it would amount to using the machinery for the purpose of

business. In CIT -Vs- Escorts Tractors Ltd 56 Taxmann.com 333(Delhi)”, the plant and machinery kept ready for use was held to be enough to grant depreciation. In “CIT -Vs- Southern Petrochemical Industries Corporation

Ltd 311 ITR 202 (Mad)”, the claim for depreciation on spare parts, which were stand-by items, was held permissible. In “CIT -Vs- Geo Tech Construction 244 ITR 452 (Kerala)”, it was held that an asset can be said to be in use when it is kept ready for use. It is beneficial to refer to

paragraph 5 of the said judgment, which reads as follows.

“5.Section 32 of the Act deals with depreciation.

There is no requirement that the assets should be

used for the whole of the assessment year in

question. The term used in Section 32(1) is

"owned by assessee", but that does not bring in a

requirement that the assessee should have

remained the owner of the asset in question for the

entire previous year in question. The object of the

Legislature, in granting depreciation allowance

under Section 32 of the Act, is to give due

allowance to the assessee for wear and tear

suffered by the asset used by him in his business

so that the net income (total income) is duly

arrived at. There is no factual dispute that the

assets in question were owned by the assessee. In

Machinery Manufacturers Cororation Ltd. v.

CIT[1957] 31 ITR 203 (Bom), it was observed

that the expression "used" in Section 10(2)(vi) of

the Indian Income-tax Act, 1922 (hereinafter

referred to as "the old Act") corresponding to

Section 32 of the Act has to be given a wider

meaning. The expression includes passive as well

as active user. In CIT v. Dalmia Cement Ltd.

[1945] 13 ITR 415 (Patna) and CIT v. Viswanath

Bhaskar Sathe [1937] 5 ITR 621 (Bom), it was

observed that depreciation might be allowed in

certain cases even though the machinery was not

in use or was kept idle. The question whether the

word "used" would include both passive as well as

active user was left open by the apex court in

Liquidators of Pursa Ltd. v. CIT [1954] 25 ITR

265. The words "used for the purposes of the

business" are capable of a larger and a narrower

interpretation. If the expression "used" is

construed strictly, it can be taken as connoting or

requiring the active employment or the actual

working of a machinery, plant or building in the

business. On the other hand, the wider meaning

will include not only cases where the machinery,

plant, etc., are actively employed but also cases

where there is, what may be described as a

passive user of the same in the business. An asset

can be said to be in use when it is kept ready for

use. “

8. In “CIT -Vs- Refrigeration & Allied Industries Ltd

323 ITR 672”, the machineries were kept under good

working condition so that it could be used at any moment,

all expenses relating to the said machinery (cold storage)

were allowed to be claimed as depreciation. In “CIT

-Vs-Shahbad Co-op Sugar Mills Ltd 12 Taxmann.com 421

(Punjab & Haryana)”, the machinery which was kept

ready for use was held to qualify for depreciation under

Section 32 of the Act.

9. The above decisions will clearly show that even

trial production machineries kept ready for use etc., were

considered to be used for the purpose of business to qualify

for depreciation. In “CIT -Vs- Geo Tech Construction 244

ITR 452 (Kerala)” , the machinery which was purchased by

the assess from Pondicherry was yet to reach work site at

Kochi and were in transit, and the Court held that it would

amount to passive use and would qualify for depreciation.

Thus, we are of the considered view that the Tribunal erred

in reversing the order passed by the CIT (Appeals). For all

the above reasons, the substantial question of law No.1 is

answered in favour of the assessee. ..."

5. From the above Judgment it is clear that even trial production

machineries kept ready for use etc., were considered to be used for the

purpose of business to qualify for depreciation and further held that it

would amount to passive use and would qualify for depreciation.

6. The ratio laid down by the Hon'ble Division Bench of this

Court squarely applies to the facts and circumstances of the present

case.

7. The learned counsel appearing for the appellant has not

produced any contra judgment in support of the Revenue.

8. In these circumstances, following the ratio laid down by the

Hon'ble Division Bench (cited supra), the Tax Case Appeal is liable to

be dismissed. Accordingly, the same is dismissed. No costs.